John McGrath – The properties that investors shouldn’t buy
Last week we looked at rising rents and the opportunity local investors have today before we see the broader return of overseas buyers.
This week we’re going to look at the properties investors should typically avoid.
People say there’s one rule in real estate – ‘location, location, location’. But there’s a broader rule that includes location but encompasses other things as well – and that’s to always buy quality. This includes a good location, a favourable aspect, a nice street and modern fixtures and fittings.
With that in mind, let’s take a look at the properties that you shouldn’t buy.
‘Bargain’ second-tier city locations
You sometimes see ads for apartment blocks targeted at investors. On paper they sound great – brand new, two bedrooms, two bathrooms, balcony, security car space, inner city location. The pricing is very keen. Sounds like a bargain but be cautious. If something looks too good to be true, it probably is.
Once you get over the lure of the low asking price, you’ll soon realise these blocks are in inferior locations that don’t appeal to owner-occupiers. There will be little growth in the long run.
The reason the pricing is so keen is probably because the developer has bought the site cheaply as no one wanted it; and/or they’ve been able to get away with inferior fixtures and fittings.
A rental guarantee is where a developer guarantees an incoming purchaser a certain minimum rent for an initial period. The developer will subsidise any shortfall from the guaranteed amount. You’ll see a big headline in the ad: ‘Guaranteed 7% per annum for the next five years’.
Rental guarantees are often used by developers to justify inflated prices. It’s not uncommon for the rent to drop when the rental guarantee period expires, leaving you with a big hole in your budget.
My view is that an investment property should be able to stand on its own two feet. If someone has to guarantee the rent, then it’s probably not a sustainable, realistic rent.
I’m a great believer in just letting the market rent flow through.
Serviced apartments are a bit like hotel suites without the room service and housekeeping. They’re popular with businesspeople and holidaymakers for short or long stays. Investing in a serviced apartment carries a lot more risk than buying a house or an ordinary apartment. You’re relying on the operator to get it right; and on the tourism and business markets to remain strong.
Additionally, the resale market for serviced apartments is confined to investors. So you’re restricted to a much smaller pool of buyers. Capital growth generally comes from owner-occupiers.
Refurbished commercial property
A building that has been purpose-built for commercial or industrial use doesn’t always work well as a residential space. Compromises often have to be made with floor plans, leaving apartment owners with unworkable rooms and wasted space.
Also, when I was a young agent, the biggest problems I encountered with owners’ corporations arose from structural defects in retro-fitted commercial buildings.
Company title apartments
Company title buildings often have by-laws restricting owners’ rights to rent their apartments. They can range from a total prohibition to the prospective tenants being vetted by the owners’ committee.
With so much strata title property to choose from, there’s no need to put yourself in a position where you have to jump through these hoops each time you get a new tenant.
A lot of books on property investment advise you to be totally passionless when deciding what property to buy. It’s all about the numbers, they say. I disagree. There’s room for your intuition and feelings when you select a property. Be emotionless when it comes to negotiating the deal.